• Multi-year plan to dismantle levy structure, sensitive sectors get extra time to adapt

The Ministry of Industry has detailed the structure, timelines, and safeguards of a reform under which Sri Lanka is set to fully phase out the long-standing Commodity Export Subsidy Scheme (CESS) levy by 2029, as part of a multi-year tariff reform programme backed by international lenders, including the World Bank, following Cabinet approval.

CESS, a para-tariff imposed in addition to normal Customs duties, was originally introduced to protect selected local industries and generate revenue. 

The joint Cabinet paper on the reform was presented to the President in his capacity as Minister of Finance, Planning, and Economic Development by Minister of Industry and Entrepreneurship Development Sunil Handunnetti.

According to the paper prepared by the Ministry of Industry, seen by The Sunday Morning, the Government plans to gradually remove the remaining CESS charges applicable to 2,634 Harmonised System (HS) product categories. The move forms part of a broader effort to simplify Sri Lanka’s complex import tax regime, improve trade competitiveness, and increase transparency. 

The policy paper notes that these additional costs have increased production expenses for Sri Lankan industries, particularly export-oriented sectors, reducing their ability to compete internationally. It states that multiple layers of para-tariffs have created a structure lacking transparency and predictability. 

Immediate action in 2026 will target goods with minimal domestic impact or those critical to export sectors. 

CESS on 265 fabric-related HS codes was fully removed by 1 April and replaced with Value-Added Tax (VAT), a move aimed at levelling the playing field for the apparel industry. 

Goods with marginal CESS rates below 5%, covering 46 HS codes, will also see complete removal in the first year. In addition, 693 categories of intermediate goods will receive an immediate 50% reduction, lowering raw material costs for manufacturers. 

The second phase, spanning 2027–2028, will focus on completing reductions for standard intermediate goods. The remaining 50% of the levy on these items will be removed in two equal stages: 25% in 2027 and the final 25% in 2028. This is said to allow businesses time to adjust pricing structures and supply chains as import costs gradually decline. 

A separate, more gradual approach has been adopted for sensitive industries, with the phase-out backloaded to provide extended protection. For 107 HS codes linked to sectors such as tiles, cement, and tyres, no reductions will be implemented in 2026. 

Cuts will begin in 2027 with a 25% reduction, followed by a further 25% in 2028, while the remaining 50% will only be removed in 2029. This extended timeline is intended to give these industries the maximum possible window to improve productivity and competitiveness.

The reform will reach full completion in 2029, with the final removal of levies on 1,523 remaining goods, largely consisting of final consumption items, marking the end of the CESS regime. 

The first phase of the CESS phase-out began in March 2023 through Gazette Notification No.2325/06, following a Budget policy announcement. The 2026 Budget has reaffirmed the decision to eliminate para-tariffs on a phased basis. 

Speaking to The Sunday Morning, Deputy Minister of Industry and Entrepreneurship Development Chathuranga Abeysinghe stressed that the existing para-tariff regime had constrained Sri Lanka’s export growth. “As a small country, we cannot grow exports without creating trade connections with other countries,” he said, noting that exports had remained stagnant at approximately $ 12 billion.

Abeysinghe noted that while para-tariffs had been introduced to protect local industries, long-term outcomes had been limited. “Some industries in our country have enjoyed these para-tariffs for over 10 years; however, their productivity has not increased,” he said, adding that these taxes had driven up consumption costs and the prices of industrial raw materials.

He also highlighted the impact on the construction sector, stating that cumulative para-tariffs had pushed construction costs in Sri Lanka 100–130% higher than in other countries, affecting housing affordability. 

While the broader removal began in April, the Ministry of Industry has intervened to protect sensitive local sectors. Abeysinghe said that the removal of CESS for 107 HS codes, including tiles, cement, and tyres, had effectively been delayed until 2028 to provide time for adjustment.

In order to address concerns over a potential influx of cheap imports, the Government plans to strengthen safeguards, including anti-dumping laws, enforcement of national quality standards, and enhanced Customs oversight to prevent under-valuation.

Meanwhile, the Exporters’ Association of Sri Lanka (EASL) has expressed strong support for the removal of CESS and other para-tariffs, arguing that the reform would enhance Sri Lanka’s global trade competitiveness while modernising its trade regime. 

EASL Chairman and Joint Apparel Association Forum Sri Lanka (JAAFSL) Secretary General Yohan Lawrence said that the association supported the removal of all para-tariffs, noting that the move demonstrated Sri Lanka’s willingness to engage more actively in international trade and facilitate Free Trade Agreements.

Lawrence said the removal of para-tariffs would boost export competitiveness by lowering input costs, improving supply chain efficiency and industrial productivity, eliminating distortions in the tariff structure, and modernising Sri Lanka’s trade regime. 

He added that the reforms would align the country’s trade framework with World Trade Organization norms, strengthen trade negotiations, support commitments under the International Monetary Fund (IMF) programme, and contribute to long-term economic resilience by creating a predictable, rules-based environment for investors and exporters. 

Addressing concerns about the impact on domestic industries, Lawrence said that CESS, which had been in place for decades, now primarily served to protect a limited number of large enterprises while increasing costs for consumers.

– By Methmalie Dissanayake